Case Report: Liberty Power Corp., LLC v. Katz et al

On January 26, 2011, the Honorable Nicholas Garaufis, sitting in the Eastern District of New York, decided a motion for preliminary injunction submitted by the plaintiff, Liberty Power Corp., LLC (“LPC”). Liberty Power Corp., LLC v. Stuart Katz, Stuart A. Katz, inc. & Foundation Energy Services, LLC, No. 10-CV-1938, 2011 WL 256216 (E.D.N.Y. Jan. 26, 2011). The motion sought to prevent defendants, Stuart Katz, Stuart A. Katz, inc. (“SAK”), and Foundation Energy Services, LLC (“FES”) (collectively “Defendants”) from using LPC’s proprietary information to solicit its customers. Though the Judge found a likelihood of success on the merits, he did not foresee irreparable harm occurring in the absence of an injunction and therefore denied LPC’s motion.

Relevant Facts

LPC provides electricity for a range of customers in states with deregulated energy markets, such as New York. It solicits business through both in-house sales staff and through independent brokers or contractors, referred to as “sales channels.” SAK and FES, both owned by Stuart Katz, contracted with LPC to become sales channels from 2006-2010 and 2008-2010, respectively. Contracts for both defendants contained specific provisions protecting the confidentiality of LPC’s customer information, though only the contract with FES required that it not compete with LPC “in any manner whatsoever.” Id. at 2. Additionally, Stuart Katz signed two separate agreements on his own, promising not to disclose proprietary information regarding LPC’s business.

LPC maintains that trade secret protection should be granted for its information regarding: (1) contact information of customers; (2) customer’s order history; (3) customer rates; (4) types of products purchased by customers; (5) customer contract renewal dates; and (6) data on customers' annual electricity consumption. LPC employs several measures to ensure the confidentiality of its proprietary information, including nondisclosure agreements with employees, a data classification system in which highly confidential information is disclosed solely on a “need to know” basis, and unique, password protected accounts for each employee, allowing LPC to control the level of access granted to different users.

LPC alleges that over an eighteen month period from 2008-2010, the Defendants paid two different in-house sales staff to intentionally misappropriate proprietary information about thousands of LPC customers. This information, LPC contends, was in turn used by the Defendants to sign customers already being handled by other sales channels, thus collecting a commission, and to bring customers to rival power companies. LPC filed a complaint against the Defendants for misappropriation of trade secrets and unfair competition and then filed for a preliminary injunction to prevent further misappropriation of this information.

The Court’s Decision

In ruling on the motion for preliminary injunction, the court looked to see if LPC established both a likelihood of success on the merits and irreparable harm in the absence of the injunction. Applying New York common law to the first prong, Judge Garaufis focused on whether LPC established a valid trade secret and misappropriation of that information. In finding protectable trade secrets, the Court noted the significant investment of time and resources, the value of the information both to LPC and to its competitors, and the extensive security protocols used by LPC. Further, the Defendants’ argument that the information is readily ascertainable was deemed unrealistic because independently obtaining this information would “require a Herculean effort by an army of improbably persuasive telemarketers.” Id. at 6.

The court further acknowledged that the Defendants likely misappropriated these trade secrets by bribing at least one LPC employee to obtain the information, an improper means of acquiring a trade secret under both the Restatement (Third) of Unfair Competition and the Restatement (First) of Torts. The court also suggested in a footnote that the alleged conduct is not only improper, but may also be criminal. Thus, the court found a likelihood of success on the merits that the Defendants misappropriated LPC’s trade secrets.

The court then looked to the issue of irreparable harm in the absence of an injunction and rejected LPC’s reliance on dicta from the Second Circuit, which suggested that in certain circumstances a rebuttable presumption of harm arises upon determination of trade secret misappropriation. Faiveley Transport Malmo AB v. Wabtec Corp., 559 F.3d 110, 116 (2d Cir. 2009). Instead, the court looked to a recent Second Circuit copyright case, which in extending a Supreme Court preliminary injunction ruling in a patent infringement case, repudiated the use of categorical or general rules in assessing injunctions for any type of case. Salinger v. Colting, 607 F.3d 68, 80 (2d Cir. 2010) (quoting eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006)). Thus, the court held that plaintiffs in a trade secret case must establish an actual or imminent risk of irreparable harm on a case-by-case basis. This seemingly heightened burden removes the possibility of reliance on any categorical presumption of harm and requires more detailed pleading by the plaintiff.

The court found LPC’s arguments in this regard inadequate. LPC alleged that the harm it sought to prevent was the possibility that the Defendants would use the trade secrets to undercut contracts with certain customers and move them to competing companies, harm it argued was unquantifiable. However, regardless of the potential imminence of this outcome, the court held that because the complaint centers on information for a finite number of customers, any harm that results will be easily measurable and compensable through an award of damages after trial.

The court thus found that LPC failed to carry its burden in showing that it would be irreparably harmed in the absence of an injunction, thereby denying the motion. LPC filed for reconsideration of the motion but has since withdrawn this motion. The case continues to move towards trial.

The Takeaway

In light of this ruling, it is now clear that when bringing a motion for an injunction, whether preliminary or permanent, plaintiffs in a trade secrets case must not rely on a categorical rule or presumption of harm. Instead, they must be prepared to prove an actual or imminent risk of irreparable harm in order to be successful.